Is Cobham plc a buying opportunity after it slumps 15% on profit warning?

Could Cobham plc (LON: COB) be a top turnaround stock after today’s update?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Aerospace and defence company Cobham (LSE: COB) has slumped by 15% today after the release of a disappointing trading update. The company’s profit for 2016 is expected to come in below previous guidance, which has clearly caused investor sentiment to decline. The company has also suspended its dividend and commenced a full review of its financial situation. Could this be the right time to buy it, or should investors wait for further news?

A tough year

While Cobham was expected to record group trading profit in the range of £255m and £275m according to its update in October, it’s now expected to be around £245m. This is clearly disappointing and shows that the business has struggled in what has been a difficult period for the wider aerospace and defence sector.

However, things could get worse before they get better. The new management team is conducting a thorough review that will focus on the balance sheet and on major contracts. The trading profit could therefore change, as there’s significant uncertainty surrounding the outcome of the KC-46 tanker programme. The company continues to be in discussion with the customer on the commercial terms for the complex conformity and qualification phases of the contract. As such, 2016’s profit figure could worsen.

Outlook

Despite its tough year, Cobham was able to reduce net debt to £1.03bn from £1.21bn a year earlier. It has benefitted from a weaker pound and could continue to do so over the course of 2017. Concerns surrounding Brexit are likely to increase as negotiations commence within the next few months. This could lead to greater uncertainty for the UK economy and a weaker pound. That’s especially the case since the dollar is forecast to strengthen as the Federal Reserve adopts a tighter monetary policy, which is expected to yield three interest rate rises this year.

Clearly, Cobham’s outlook is highly uncertain. It’s therefore difficult to forecast how the business will perform in 2017. However, it could be a buying opportunity since it seems likely that the new management team will turn its performance around. A similar process occurred at sector peer Rolls-Royce (LSE: RR), where its financial performance came under severe pressure. However, since it’s a high quality business and under a new management team, it’s expected to record a rise in its bottom line of 45% in the current year.

Therefore, Cobham could deliver a similar turnaround over the medium term. For now though, it seems likely that volatility will remain high. Furthermore, since a review is being conducted on its major contracts, a share price rise seems unlikely until this process is complete. It seems prudent for investors to wait for this process to come to a conclusion before buying it, although in the long run the company could prove to be a strong performer.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »